EU summit must produce a European Solution – Not a second Greek bailout

20 July 2011

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Will European leaders put an end to the fires of the crisis?Image Source: Reuters

The heads of states and governments of the euro zone will be meeting on Thursday, July 21 to decide on a plan to deal with the spiraling, systemic crisis of the EU and the euro. From the news that have been made public so far and from the statements of various EU officials and member-state leaders, expectations about a true solution to the crisis are low since there is no consensus over future action. In fact the markets seem to believe that the decision that will be produced will not even be worth the paper it will be printed upon, as they seem to expect that a real solution will be postponed for September. The discussion so far is centered around another bailout to Greece. There are three problems with that.

The first is that apparently the austerity regime coupled with the high interest rates of the original bailout to Greece did not produce the expected results, hence it is a failure, otherwise the discussion over a second bailout package would have been completely devoid of sense.

Second the problem is not Greek, because if it was there wouldn’t be all this discussion, since Greece accounts for an ancillary percentage of the entire area’s GDP. The problem is systemic, it lies in the structural flaws of the euro, in the poorly regulated banking sector and in the lack of a serious long-term investment plan for regional growth. The crisis is in fact three crises in one. It is the sovereign debt crisis, the banking sector crisis that includes quasi-bankrupt, “zombie” banks with serious liquidity problems; and it also is an under-investment crisis. Failing to realize that means failing to solve the crisis.

Third the idea of taking money from European taxpayers and giving it to fiscally challenged countries who themselves hand it on to major private European banks is completely counter-productive as it does not help anyhow in solving the problems in the real economies of those countries. Contrary it plunges them into a deeper recession, to higher unemployment, to less income, to years of under-development. It is only a means of postponing the inevitable Greek default to buy precious time that will allow for the fortification of certain major banks who are the main creditors of Greece.

European leaders still cling to their stubborn beliefs of narrow bailout packages to individual countries, instead of accepting the reality that lies in front of their eyes: That the crisis is a European issue and as such it requires a European solution to it. Not ad hoc, non-credible, self-defeating “solutions”.

A group of economists from various European Universities published an open letter to European leaders pointing to the need of immediate action otherwise the very existence of the euro is threatened. Here’s the letter (I first found this in Economics Intelligence – thanks for sharing!):

The debt crisis has reached the core of the Eurozone.</p>

Italy and Spain are now directly involved in a serious credibility crisis.The creditworthiness of more than one-third of the Eurozone is being challenged.

For the first time, the very survival of the euro is at stake.

EU leaders gathering in Brussels on Thursday face a historical responsibility. It is essential that an agreement be reached on a plan that prevents further escalation of the crisis.

As economists actively involved in the policy debate, we have offered a number of suggestions. The common thrust of these proposals is that the expansion the European Financial Stability Facility (EFSF) is essential; it must be able to make banks strong enough to withstand a default by Greece. The EFSF should also be allowed to operate in secondary bond markets and be given operational flexibility and independence. There are many technical details and many variants of these proposals. The important thing is to acknowledge that leaders are out of time. Deciding to not decide could mark the end of the Eurozone as we know it.

The group of economists clearly stresses the impotence of time in dealing with the issue and that European leaders simply cannot afford to kick the can down the road. But they should also stress that the crisis needs a decisive European solution. I also agree that the EFSF’s role should be expanded to allow it to intervene in the secondary market and buy back government bonds. But that will have a negligible impact on the whole crisis, since the EFSF alone cannot solve the systemic and multi-dimensional crisis that has gripped the EU. Audacious decisions that bear political cost for all sides need to be taken.

These hours are tough and will possibly decide the future of the single currency. The whole business- and politics-oriented world is watching, waiting to see if European leaders will stand up to the importance of those times, or whether they will continue to hide problems under the carpet as they have been doing for long now. The outcome of the summit will tell.